Huntsman Corporation (HUN, Buy: $40 PT)
Venator SPO Helps Pave Path to Investment Grade• Venator announced a secondary public offering (SPO). After the close on Monday Buy-rated Venator Materials PLC (VNTR) launched a SPO of 18.0mn shares to be sold by Buy-rated Huntsman. Huntsman also granted the underwriters a 30-day option to purchase up to an additional 2.7mn shares. We view the news as consistent with Huntsman’s stated objective to monetize its stake in Venator and consider the event a marginal positive for Huntsman to the extent that VNTR shares have generally performed well since the company’s IPO at $20.00 per share on 3 August 2017. On a post-SPO basis, Huntsman’s ownership stake in Venator would decline from 75.4% to 58.5%, or 56.0% assuming exercise of the underwriters’ option.• Deal timing is early, yet unsurprising to us. With regard to timing, we note that this SPO occurs before the expiration of Venator’s 180-day post-IPO lockup period on 30 January 2018. However, we are not at all surprised by the timing given market speculation in recent weeks that Huntsman may wish to act sooner in order to take advantage of favorable market conditions. We continue to expect Huntsman’s remaining stake in Venator to be monetized fully by...• Proceeds help pave the path to investment-grade status. Management has over-delivered on FCF targets over the past two years and has committed to a forward range of $400-600mn, which implies a FCF yield of 5.3% to 8.0% vs. our 6.2% in 2018. We are impressed with the company’s progress on capex and also working capital, which is embedded in incentive compensation across the portfolio. Thanks to solid FCF and proceeds from the IPO of VNTR, Huntsman’s net debt stood at $2.4bn on 30 September, or 1.9x our 2018 estimate of EBITDA, which includes zero contribution from Venator, since we extracted this business from our financial model following its re-classification as a discontinued operation effective 1 July 2017. On a pro forma basis for today’s SPO less estimated taxes and fees of 10%, Huntsman’s net debt would sink to $2.0bn or 1.6x our 2018 estimate of EBITDA of $1.26bn. Looking further ahead, full monetization of VNTR, would imply...• We rate shares of HUN Buy, with a price target of $40. Our price target implies total return potential of 32%, including a dividend yield of 1.6%. As a reminder, following the mutual abandonment of the Clariant MOE, we adjusted our valuation methodology to be more consistent with that of diversified chemical industry peers, such as Celanese and Eastman. We now value Huntsman based on the value of its stake in VNTR net of taxes and fees ($6-7 per HUN share pre-deal and ~$5 post-deal) plus an average of the following three methodologies on an ex-Venator basis: DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF analysis suggests a warranted value of $44 per share on a Huntsman stand-alone basis. Using our relative valuation framework, our P/E multiple at a 35% discount to the S&P500 multiple implies a fair value of $29, while our EV/EBITDA-based valuation incorporates a discount of 2.75 turns vs. our coverage average, and implies a fair value of $27 per HUN share.
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